Pound Sterling steadies after mixed UK Employment report

Source Fxstreet
May 14, 2024 07:21
  • The Pound Sterling remains on the sidelines around 1.2560 after weak UK Employment data.
  • UK employers laid off workers for the third time in a row but wage growth remains steady.
  • The US Dollar consolidates ahead of US inflation, Retail Sales data for April.

The Pound Sterling (GBP) remains in a confined range of around 1.2560 in Tuesday’s London session as investors take time to analyse the United Kingdom Employment data for three months ending in March. The United Kingdom (UK) Office for National Statistics (ONS) has reported that labor market has witnessed a drawdown for the third time in a row while wage growth momentum remains steady at relatively high levels.

UK employers laid off 177K workers, which was higher than the firing of 156K employees in the December-February period. The ILO Unemployment Rate rises to 4.3% as expected from the former reading of 4.2%. The labor market data clearly indicates that the economy is struggling to bear the consequences of higher interest rates by the Bank of England (BoE).

In the current scenario, the situation seems favorable for the BoE to begin reducing interest rates, as price pressures are also consistently softening. However, strong wage growth that is feeding service inflation will continue to remain a major concern for BoE policymakers.

Annual Average Earnings (both excluding and including bonuses) grew steadily by 6.0% and 5.7%, respectively, for the three months to March period. Investors anticipated Average Earnings, including bonuses, to decelerate to 5.3%.

Daily digest market movers: Pound Sterling consolidates as traders reassess BoE rate-cut hopes after UK Employment report

  • The Pound Sterling ranges around 1.2560 against the US Dollar. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, rebounded after discovering buying interest near the weekly low at around 105.00. However, it has turned sideways, around 105.20, as investors await the United States Producer Price Index (PPI) data for April, which will be published at 12:30 GMT.
  • Annual headline PPI is forecasted to have grown by 2.2% from 2.1% in March. In the same period, the core PPI, which strips off volatile food and energy prices, is estimated to have grown by 2.4%, at the same pace as the previous month. Economists anticipate that monthly headline PPI rose at a higher pace of 0.3% from the prior reading of 0.2% with core reading growing steadily by 0.2%.
  • This week, the US economic calendar is filled with top-tier data. The next move in the US Dollar will be majorly driven by the Consumer Price Index (CPI) and Retail Sales data for April, which will be published on Wednesday. The consumer inflation data will influence speculation about the Federal Reserve (Fed) returning to policy normalisation from the September meeting.

Technical Analysis: Pound Sterling remains well-supported above 20-day EMA

The Pound Sterling exhibits strength near 1.2560 due to a strong near-term outlook. The GBP/USD pair remains comfortably established above the 20-day Exponential Moving Average (EMA), which trades around 1.2530. The pair has retraced 38.2% losses recorded from a 10-month high around 1.2900.

The Cable continues to face pressure near the neckline of the Head and Shoulder (H&S) chart pattern formed on a daily timeframe. On April 12, the pair fell sharply after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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